Just like how online news sites are making newspapers disappear, and online travel sites are replacing traditional travel agencies, television could end up replaced by online video streaming. This market is dominated by Netflix (NASDAQ:NFLX), but traditionally belonged to cable companies such as Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).
The on-demand streaming Internet streaming media company has become the largest subscription streaming service provider, and consequently its stock price has increased an amazing 400% this year.
However, to justify its rich valuation, Netflix will have to continue increasing its revenue at an amazing speed for the next decade. In other words, the company will have to replicate its national success in international markets, and it will also need to capture video market share from traditional cable companies. How does Netflix plan to do this?
The war for the video market
Netflix's main competitive advantage lies in its vast library of DVDs and TV shows. Unlike TV cable, with Netflix customers can watch previous seasons of their favorite shows any time they want. Aware of this advantage, the company is continuously increasing its number of movies and shows for every genre. For example, in the latest quarter Netflix introduced new shows from Disney Jr. and The Cartoon Network, targeting children. Furthermore, if customers cannot find the movie they are looking for they can rely on DVD mail rentals, a service also provided by Netflix.
Netflix is also trying to become a major player in content creation. Some of its original shows include crime drama Lilyhammer and political drama House of Cards. Although content creation is a new business for Netflix, some of its original shows have received very positive reception, with second seasons currently in production. Content creation will allow Netflix to differentiate its service from other online streaming competitors such as Amazon Prime and Hulu, which are also active content buyers.
Notice that according to IDC technology research, as much as 85% of people who own streaming players also subscribe to cable or satellite. That's because sometimes streaming players don't offer live sports or top channels, like ESPN, HBO or Discovery.
The more original content, the merrier
To differentiate their services from most streaming players, cable companies are adding more exposure to the content creation business. For example, Comcast recently purchased media giant NBCUniversal. This strategic acquisition allows the company to protect its cable business, which provides two thirds of its revenue and more than 80% of its earnings. It allows Comcast to take control of the exclusive content distribution rights for some of the best studios in the world like Universal Pictures and Focus Features. These studios have become famous for making blockbusters from Jurassic Park to The Fast and the Furious.
The new Comcast will own 10 TV and movie production studios, 20 cable channels, nine regional sports cable networks, and 15 Telemundo stations. Comcast could easily raise the cost of exclusive content or deny rival distributors access to its programming. And by acquiring NBCU, Comcast also acquired a 30% stake in Netflix's direct competitor Hulu. This move allowed Comcast to add exposure to the streaming business and to diversify its portfolio of investments.
Time Warner Cable, which also owns several sports channels and local news channels, is heavily investing in technology. Last week, the company acquired DukeNet Communications, a company that provides high-capacity bandwidth services, for $600 million. Together with Microsoft, Time Warner Cable also launched an application in August to offer television viewing through the Xbox console. Time Warner Cable has also formed a joint venture with Comcast to create a common platform for accelerating the development of next-generation video services. This framework will allow cable companies to reach more video playing devices.
The Foolish takeaway
Netflix already owns 32% of the promising streaming video space, and has plans to capture even more market share. To defend against Netflix, cable companies are heavily investing in content creation and technology. This could set user acquisition costs for Netflix even higher.
Netflix is responding by buying as much exclusive content, creating original shows as possible and by innovating its platform. It recently improved its iOS application to allow high definition streaming, and introduced a feature to save favorite titles. After reaching 38 million subscribers across 40 countries, growing further becomes a massive challenge for any company. However, if Netflix keeps innovating its business model, it may be able to effectively replace the television in the long run.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.